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Investment Overview for Dunkin' Brands (NYSE:DNKN)

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Below are key drivers of Dunkin' Brands value that present opportunities for upside or downside to the current Trefis price estimate for Dunkin' Brands:

Dunkin' Donuts U.S.

Average Revenue Per Outlet: Dunkin' Donuts U.S. Average Revenue Per Outlet (ARPO) increased from $0.78 million in 2009 to $0.91 million in 2014. We expect the ARPO to grow at a CAGR of 2.5% and reach $1.06 million by the end of the Trefis forecast period. In a slightly bearish scenario, if the growth rate slows and the ARPO only rises to around $1 million, we could see a 6% erosion in the stock price. On the brighter side, if the ARPO rises to around $1.21 million helped by menu expansion, we could see the stock price jumping by more than 13%.

Total Number of Outlets: In 2009, Dunkin' Donuts U.S. had 6566 outlets nationwide. In 2010, it added 206 new outlets. In 2011, the restaurant chain added 243 new outlets to have 7015 points of distribution. By the end of 2012, there were 7,306 Dunkin' Donuts U.S. stores. The expansion accelerated in 2013 as the company added 371 restaurants in the U.S. The company opened 405 Dunkin' Donuts U.S. stores in 2014. We expect the company to keep adding 375 outlets annually so that the total number of stores in the U.S. reaches about 10,500 by the end of the Trefis forecast period. However, if the rate of expansion accelerates and the number of outlets crosses 11,000, then we could see the price estimate rising by more than 4%. On the other hand, if growth remains subdued and the company only manages to reach 9,000 outlets, we could see the estimate declining by nearly 15%.

For additional details, select a driver above or select a division from the interactive Trefis split for Dunkin' Brands at the top of the page.

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Dunkin' Brands is a leading franchisor of restaurants, which serve hot and cold coffee, baked goods, and ice cream. It franchises restaurants under the Dunkin' Donuts and Baskin-Robbins brands. Dunkin' Brands has a presence in nearly 60 countries.

It operates in four segments: Dunkin' Donuts U.S., Dunkin’ Donuts International, Baskin-Robbins International and Baskin-Robbins U.S. In 2014, the Dunkin' Donuts U.S. segment generated revenues close to $560 million, or 76% of the total segment revenues.

As of December 27, 2014, there were 11,310 Dunkin' Donuts globally and 7,552 Baskin-Robbins points of distribution.

Dunkin' Donuts U.S., Baskin-Robbins U.S., Dunkin' Donuts International, and Baskin-Robbins International, primarily derive their revenues through royalty income, franchise fees, and rental income. The company's international business runs via joint-ventures and country license agreements with franchises, who operate and sub-franchise the brand within their licensed areas. Baskin-Robbins International also manufactures and sells ice cream products.

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Strong and established brands

Dunkin’ Donuts and Baskin-Robbins brands are well established brands globally. We believe this makes it easier for Dunkin' Donuts to launch new product lines as customers are aware of their brand and trust it immensely. Moreover, this makes it easy for the brand to expand internationally, where they still have the potential to have a strong impact and without any major headwinds. Moreover, the company is planning to expand its international reach through aggressive expansion plans in China, India, Germany, and Mexico.

Franchised business model provides a platform for growth

Dunkin' Brands operates mainly on a full fledged franchise model unlike its competitors, such as Starbucks and McDonald's, which follow a mix of the company operated and franchise business model.
Margins are higher in the franchise model as compared to the company operated model due to low capital investments required. New store development and substantially all of the store advertising costs are funded by franchisees,
and thus explain the high margins in this business model.

Focus on store level economics

In recent years, Dunkin' Brands has undertaken significant initiatives to further enhance store-level economics at its franchises. Dunkin' Brands also facilitated approximately $220 million in franchisee cost reductions primarily through strategic sourcing and other initiatives such as rationalizing the number of product offerings to reduce waste, optimize inventory, and enable mobile payments.

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Increase in health consciousness among customers

People are becoming more aware about healthy food intake. Customers are cautious of health disorders resulting from junk food. Consequently, fast food companies have started offering healthier food offerings in order to catch up with this fast emerging trend. We believe this trend will emerge as a key factor that could govern product offerings in the future.

Strong Competition in the restaurant industry

Over the last couple of years, quick service restaurants are facing stiff inter-industry competition for breakfast market share, as breakfast is gradually becoming the highest grossing daypart for the industry. All the top fast food chains have introduced new innovative menu items and expanded their beverage portfolio, especially coffee.

Shift in ice cream consumption in U.S.

The ice cream industry in the U.S. is shrinking gradually. In recent times there has been a growing trend of increased ice cream consumption at home as several key brands are becoming available at grocery stores. As a result of this, sales at ice cream parlors are declining. Over the years, Baskin-Robbins has shut down its superfluous outlets in the U.S.

Relatively unfazed by rising food and commodity inflation

Since most of its restaurants are franchised, Dunkin' Brands is relatively unaffected by high commodity and food prices. The prices of coffee, dairy products, and sugar have skyrocketed since the onset of calender year 2014. Eventually, the input costs influence the menu prices which ultimately impacts the profitability of the company.

Increasing competition from Fast-casual restaurants

Fast casual restaurants are a relatively fresh and rapidly growing concept, positioned somewhere between fast food restaurants and casual dining restaurants. Technically, being the hybrid of the two concepts, they provide counter service and offer more customized, freshly prepared, and higher quality food than traditional QSRs, all in an upscaled and inviting ambiance. People with higher disposable incomes and increasing health concerns are changing their food preferences, and are ready to pay some extra bucks for a better quality of food.

Expansion in the Western and emerging markets

Most of the Dunkin' Donuts U.S stores are concentrated in the eastern part of the U.S and don't have a big presence in the western U.S. The company’s plans to expand in the western markets are on the charts. Adding new assets to the company will help them generate more revenues for the upcoming quarters. In the long-term plan, the company plans to add around 5,000 Dunkin’ Donuts units in the western market, around 3,000 in the emerging markets, and only 400 in its core eastern market, to take the total Dunkin’ Donuts U.S. units to 17,000.
The company has doubled its footprint from 32 restaurants in 2010 to 64 in 2013 in Texas, a lucrative western market. In the state, the average weekly sales of the restaurants grew by 57% in the last three years. On the other hand, the comparable same store sales rose from 1% in 2010 to 9% in 2013. Looking at the potential growth opportunity, Dunkin’ Donuts plans to open 800 to 1,000 net new restaurants in the region in the long term. Another major focus area for the company is California. According to Nigel Travis, company’s Chairman and CEO, Dunkin’ Donuts is slated to open 4-5 restaurants in California by the end of fourth fiscal quarter, much earlier than its original expected date. The company announced the locations of its stores in California on June 10, and also mentioned its plans to open 54 more stores in Southern California in the coming years.

Trefis Forecast Rationale for Total Number of Outlets

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This refers to the total number of Baskin-Robbins outlets globally, excluding the U.S.

As of December 27, 2014, there were 7,552 Baskin-Robbins outlets globally, of which 5,068 were in international locations with the remaining stores in the U.S.

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The ${forecast} have increased consistently, with the company adding close to 300 outlets each year on average. In 2009, the number of outlets internationally were 3,570, whereas in 2010 there were 3,848. In 2011, the total outlets increased to 4,218 locations. In 2012 and 2013, the company added 338 and 277 new restaurants, respectively. The growth development slowed down in 2014, as the company added 235 net new stores for the segment.

Going forward, we expect the company to keep on adding 250-300 new stores annually.

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Trefis considered the following factors in its forecast:

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Growth in store count

In 2014, Dunkin' Brands opened 704 new stores globally, out of which 235 stores were Baskin-Robbins international stores.

Baskin-Robbins signed an agreement in 2013 which will see 249 new store additions in China within the next ten years.

Baskin-Robbins signed a franchise agreement with Blue Star Food Corporation which will see the opening of about 50 locations in Vietnam in the next few years.

The ice cream chain plans to add another 25 outlets in the Middle East.

International markets driving growth

System-wide sales growth at Baskin-Robbins International has been strong over the last couple of years. However, over the last two years, it witnessed positive sales growth in South Korea and the Middle East.

Baskin-Robbins is heavily penetrated in the Middle East region and has strong partnerships in Japan, Korea, Australia, and Columbia.

Baskin-Robbins international added 235 net new restaurants, with major growth in Russia, the U.K, China, and Japan.

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Geographical risks involved

Failure in understanding and blending with the local culture and taste poses a potential risk to Baskin-Robbins' international expansion plans.

How Does Trefis Modelling Work?

How do we get the historical numbers for this chart?

Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.

Who came up with the Trefis forecast for future years?

The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.

How does my dragging the trendline on the chart impact the stock price?

We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.

We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.

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